TMI Blog2021 (11) TMI 317X X X X Extracts X X X X X X X X Extracts X X X X ..... for A.Y. 2007- 2008 which has also been followed in subsequent years, we hold that payment of Supplementary Rent is exempt from tax in hands of Lessors as per provisions of section 10(15A) and hence, disallowance under section 40(a)(i) is not called for. However, the above figure is subject to verification by the AO. Disallowance of supplementary rent for lease agreements executed after 1 April 2007 - HELD THAT:- Profits from rental of Aircrafts is taxable only in state of residence of Lessor. We, therefore, find merit in the arguments of the Learned Senior Counsel for the Assessee that as per Articles 12 and 8 of the Tax Treaty with Ireland, profits derived by an enterprise of a contracting State from rental of Aircraft are taxable only in Ireland. Supplementary Rent paid for Lease Agreements executed after 01.04.2007 are, therefore, not chargeable to tax in India. However, the above figure is subject to verification by the A.O. - ITA Nos. 432, 433 & 7695/Del/2018 AND ITA Nos. 412 and 413/Del/2018 - - - Dated:- 29-10-2021 - Ms Suchitra Kamble, Judicial Member And Shri Prashant Maharishi, Accountant Member For the Assessee : Shri Tarandeep Singh, Adv.; And Shri Pul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axation Avoidance Agreements between India and Ireland. 3. In ITA number 412/Del/2018 is filed by The Additional Commissioner Of Income Tax, Special Range 4, New Delhi against the order of the learned CIT appeal for that year dated 10/10/2017 wherein the learned assessing officer has raised the following grounds:- i. whether on the facts and circumstances of the case and in law, the learned CIT A erred in deleting the addition of ₹ 7,163,559,916/ made by the assessing officer in respect of supplier credits received from various supply of aircraft parts (mainly from International Aero engines, AG ) holding the same to be capital receipt and not as revenue receipts as held by the assessing officer ii. the learned CIT A has erred in ignoring that the receipt of ₹ 7,163,559,916/ constituted receipts from exploitation of valuable commercial rights arising in the course of systematic in real business activity and such receipts would otherwise constitute income liable to be taxed Under the provisions of Section 28 (iv) of the income tax act, 1961. 4. The learned AO has raised an additional ground of appeal by letter dated 20 February 2018 as Under:- w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n lease rental paid by the assessee is also to be considered as capital expenditure. The assessee has amortized a sum of ₹ 366,32,13,778/- against the lease rentals. She confirmed that as the lease rent as capital expenditure. Thus, disallowance of ₹ 366,32,13,778/- was confirmed. With respect to the disallowance of supplementary lease rent for none deduction of tax at source disallowed u/s 40(a)(i) of the act of ₹ 535,16,67,041/-, She followed the decision of the Hon'ble jurisdictional High Court in assessee s own case for earlier Assessment Year wherein, it has been held that payment of supplementary lease rent under lease agreement entered into before 31.03.2007 is exempt u/s 10(15A) of the Act and no disallowance u/s 40(a)(i) of the Act can be made. With respect to the lease agreement entered after 31.03.2007, she held that the article 12 of the Double Taxation Avoidance Agreement between India and Ireland exempts royalty or fee only which includes only regular lease rent paid and not supplementary lease rent. Accordingly, she confirmed the addition of ₹ 535,16,67,041/- upholding the order of the ld AO. Accordingly, appeal of the assessee is partly a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o filed the copy of the decision of the Special Bench dated 03.09.2021. 17. We have carefully considered the rival contentions and perused the orders of the lower authorities. We find that all the issues covered in the appeal of the ld AO as well as the assessee has already been decided by the Special Bench. 18. Coming to the ground number 1 of the appeal of the learned AO which is against the order of the learned and CIT appeal deleting the addition of ₹ 7,163,559,916/ in respect of suppliers credit received from various suppliers of aircraft holding the same to be capital receipt and not as revenue receipt as held by the learned assessing officer. We find that this issue has been decided by the special bench in case of the assessee for assessment year 2012 13 in ITA number 3224/Del/2017 and 2977/Del/2017 in paragraph number 33 onwards as Under:- C. PURPOSE AND NATURE OF CREDITS RECEIVED BY ASSESSEE AND ITS TAXABILITY 33. The next issue to be decided by us is the purpose and nature of credits received by the assessee and their taxability. We have already analysed the relevant agreements above and have come to the conclusion that from Clause-A of Agreement D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the income statement. There may be additional complexity when credits are given to be used on future aircraft purchases based on a current purchase. Whether the credit is more accurately considered related to the current or future purchase needs to be evaluated. Credits may also be offered on future maintenance or other services, in these situations reducing the price of the aircraft may not be the appropriate treatment. The contract terms offered should be reviewed and the substance of the transaction considered to determine the appropriate accounting. Credits may be monetary, such as a discount or reduction to the purchase price or non-monetary, such as services or future maintenance and both forms should be considered and recognised. Non-monetary credits are typically harder to value and allocate to components. How to allocate credits is discussed further in the Identification of individual components section . 33.1.1 The Tax Department in our opinion cannot ignore commercial realities and that too premised only upon conjectures or surmises. It is not within their domain to do so. The commercial expediency should be best left to the wisdom of the businessmen. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first consider the business carried on by the assessee. In the case of Van Den Berghs Ltd. Vs Clark, reported in 3 ITR 17(HL), which was relied on by the learned special counsel for the assessee, it has been held that nature of a receipt may vary according to the nature of the trade in connection with which it arises. It was held in that case that the price of the sale of a factory is ordinarily a capital receipt, but it may be an income receipt in the case of a person whose business it is to buy and sell factories. In the instant case, the assessee before us is engaged in the business of running a low cost airline. Its source of revenue is deriving income from passenger and cargo transportation. The assessee is not engaged in either business of trading of aircraft or business of receiving credits. 33.4. Once, this is made clear, the next question that requires for our examination is as to whether the credits were received towards fixed capital or circulating capital. We find the Hon ble Supreme Court in the case of CIT vs Vazir Sultan Sons reported in 36 ITR 175(SC) relied on by the learned senior counsel for the assessee has decided the case where the issue was as to whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duration, they were none the less part of his fixed capital . 33.5. It is an admitted fact that the assessee in the instant case is in the business of operating a low cost airlines. Therefore, the aircrafts are capital assets and not circulating capital. It uses the aircraft to earn revenue. The credits received are not derived from its business activity which is to earn revenue from passenger and cargo transportation, which is a vital fact. Distinction is crucial as highlighted by the Hon ble Supreme Court in the case of Van Den Berghs Ltd. wherein it has been observed as under: The agreements formed the fixed framework within which their circulating capital operated; they were not incidental to the working of their profit-making machine but were essential parts of the mechanism itself. They provided the means of making profits, but they themselves did not yield profits. The profits of the Appellants arose from manufacturing and dealing in margarine....................... 33.6. In view of the above, the nature of the business carried on by the assessee is relevant. The submission of the Learned Special Counsel for the Revenue that since credits were related to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been regarded as taxable income. In the forms of account prescribed under the Indian Electricity Rules framed under Sec. 37 read with Sec. 11 of the Indian Electricity Act, the assessee credited service connection receipts to the revenue account and debited the Inc, corresponding cost of laying service lines to the capital account. But the classification of the receipts in the form of accounts is not of any importance in considering whether the receipt is taxable as revenue. 33.7. The assessee in this case claimed that the amount received by it for service connection from its customers was capital receipt and the Hon ble Supreme Court accepted the contention of the assessee by observing as under:- The assessee contended that the amount paid by the consumers for new connections is capital receipt and not liable to tax, because the amount is paid by the consumers towards expenditure to be incurred by the assessee in laying new service lines-an asset of a lasting character. This question falls to be determined in the light of the nature of the receipt irrespective of who remained owner of the materials of the service lines installed for granting electrical connections to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure. The total receipts being capital receipts, the fact that in the installation of capital, only a certain amount was immediately expended, the balance remaining in hand, could not be regarded as profit in the nature of a trading receipt. On that view of the case, in our judgment, the High Court was in error in holding that the excess of the, receipts over the amount expended for installation of service lines by the assessee was a trading receipt. 33.8. In view of the ratio laid down by the Hon ble Supreme Court in the case cited (supra), it is clear that there is a clear distinction between the amounts received which are related to the business and amounts received which are incidental to the business . It is relevant to note that the amounts received as part of service connection in Hosiarpur Electric Supply Co. were arising out of a commercial transaction yet the Hon ble Apex Court applied the above distinction to examine the purpose. Only amounts which are incidental to the business were held taxable as business receipts. In the instant case, credits are received for selection of engines and are understood by the parties in the agreement that the credits were Fleet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee with arrear dividends. In other words the assessee entered into the contract with the registered shareholders not only to purchase share scrips but the dividends which had been declared but not collected by him or paid over to shareholders. As the dividends had been declared long ago there was no uncertainly as to the exact amount receivable in respect of them. It is. therefore, Clear that both the purchaser and the vendor knew exactly what sum of money would come to the vendor by way of such dividend. In other words the purchase consideration included the amount of the arrear dividends and as the dividends had been declared long ago, there was no uncertainty as to the exact amount receivable in respect of them. The existence of a contract binding the vendors to make over to the purchaser the arrear dividends clearly implied that the price paid by the purchaser was not only for the value of the share scrips but also for the sum of ₹ 43,925/- which was going to be realised in the form of arrear dividends by the purchaser. The High Court held upon an examination of the evidence that such an arrangement implied that the value of ₹ 9-8-0 and ₹ 9-4-0 per s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as held in Guffic Chem (P) Ltd. vs CIT, reported in 332 ITR 602 (SC). Therefore, in order to determine the true nature and taxability of the receipt, we have to take into consideration the nature of business and agreements between the parties and then examine the purpose/object of receipt. It is only then that we examine whether a particular receipt is incidental to the main business or not. In effect, we have to see the purpose/object for which the payment is received. In our opinion, purpose test is to be applied in the hands of the recipient when taxability of receipt is in dispute and when allowability of expenditure is in dispute, the test is to be applied in the hands of the payer. Once these settled legal principles are taken into consideration, then we have no doubt over the correctness of views expressed by the Division Bench of the Tribunal in assessee s own case in Assessment Year 2007-08. We therefore concur with the view taken by the Division Bench of the Tribunal in the order passed for Assessment Year 2007-08, where the Tribunal has observed as under:- 9. We have considered the arguments advanced by the parties and have gone through the material available on r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the subsidy is given is irrelevant. 9.1 The learned senior counsel Shri Syali in his arguments has relied upon the decision of Hon ble Delhi High Court in case of Bougainvillea Multiplex Entertainment Center Pvt. Limited (supra). The importance of this judgment is that in this case after considering the Hon ble Supreme Court s decisions in the cases of Ponni Sugars (supra) and Sahney Steel (supra) and after applying the purpose test as laid down in these decisions, the Hon ble Delhi High Court has been pleased to hold as under: 31. The Revenue, however, argues in the matters at hand that the assessee cannot be allowed to treat the entertainment tax subsidy as capital receipts because the U.P. scheme leaves it at liberty to utilize the funds in the manner it likes. In this context, it craves reference to following further observations of Supreme Court (appearing in Para No.16 in the case of Ponni Sugars Chemicals Ltd. (supra):- 16. One more aspect needs to be mentioned. In Sahney Steel Press Works Ltd.'s case (supra) this Court found that the assessee was free to use the money in its business entirely as it liked. It was not obliged to spend the mone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommencement of production. Since the purpose was to offset the expenditure incurred in setting up of the project, such receipt (subject, of course, to the cap of amount and period under the scheme) could not have been treated as assistance for the purposes of trade. 35. The facts that the subsidy granted through deemed deposit of entertainment tax collected does not require it to be linked to any particular fixed asset or that is accorded year after year do not make any difference. The scheme makes it clear that the grant would stand exhausted the moment entertainment tax has been collected (and retained) by the multiplex owner meeting the entire cost of construction (apparatus, interiors etc. included), even if it were before completion of five years . 36. As held by the Supreme Court in the case of Sahney Steel Press Works Ltd (supra), the character of the subsidy is to be determined having regard to the purpose for which it is granted. The purpose test , referred to in Ponni Sugars Chemicals Ltd. (supra) when applied to the case at hand, leaves no room for doubt that the assistance in the form of entertainment tax exemption is shown to have come in the hands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal in-its Profit and Loss Account. Decision of Bougainvillea Multiplex Entertainment (supra) clearly holds that subsidy need not be linked to a particular asset. Similarly netting off of the proportionate credits with the amount of lease rentals in the profit and loss account of the appellant is a mere utilization of the receipt Merely because a capital receipt is utilized for incurring revenue expenditure it will not change the nature of capital receipt into a revenue item. As an example proceeds received. from issuance of shares by a company may be utilized for daily working capital purposes, but the nature of receipts from issuance of shares will still be Capital in nature. In the case under consideration for a better accounting purposes the proportionate credits were netted off against the recurring lease rentals. Acceptably .as pointed out by the appellant the accounting policy followed was in spirit with the AS-12 issued by ICA1. Ld C1T after having accepted that the credits were given to the appellant as a consideration for selection of IAE engines to be fitted in aircrafts manufactured by Airbus, which were also acquired by the appellant, should have held that the recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Sahney Steel (supra) and Ponni Sugar (supra) submitted a detailed reply as under : Reverting to the facts of the present case, it is submitted that credit was allowed by IAE to Interglobe on account of Interglobe preferring the engines manufactured by IAE to be fitted in the aircrafts being acquired by Interglobe. The credit given by IAE was meant to reduce the cost of the engine to befitted in the aircraft. The credit, so allowed by IAE, was not given to the assessee for assisting him carrying out the business operations but was in the capital filed, being inextricably linked with the purchase of engines, viz a capital asset. The credit was not for meeting the recurring expenses of the assessee but as an incentive for acquisition of the engines to be fitted in the aircrafts ordered from IAE . At any rate, the manner and method of utilization of an incentive/credit allowed by IAE to Interglobe in this case] does not, in our submission, alter the character of such incentive. Such credit, therefore, in our respectful submission, in-on capital account inextricably linked with engines supplied by IAE and fitted in the aircrafts supplied by Airbus and hence a capital receipt n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tigate the facts stated in the return when circumstances would make such an inquiry prudent that the word erroneous in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. 13. In the said judgment, Delhi High Court had referred to earlier decisions of the Supreme Court in Rampyari Devi Sarogi vs. CIT (1968) 67 ITR 84 (SC) and Tara Devi Aggarwal vs. CIT (1973) 88 ITR 323 (SC), wherein it has been held that where Assessing Officer has accepted a particular contention/issue without any enquiry or evidence whatsoever the order is erroneous and prejudicial to the interest of the Revenue. After reference to these two decisions, the Delhi High Court observed. 'These two decisions show that it is not necessary for the Commissioner to make further inquiries before cancelling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant. 33.14. It was this purpose test which was applied and accepted by the Tribunal in assessee s own case for Assessment Year 2007-08, wherein it was held that purpose for which credits have been received is relevant and form/mode or manner is irrelevant. We find merit in the arguments of the learned senior counsel for the assessee that purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on on 19.10.2005 when choice of the engines was made. We therefore find merit in the argument of the learned senior counsel for the assessee that the assignment of rights to acquire the aircrafts is post vesting of credits. To purchase or acquire on lease was a commercial decision taken by the assessee on a later date when aircraft delivery became due. Subsequent acquisition of aircraft on lease, therefore has no impact on the nature and character of credits which became due in October, 2005. 33.17. In our opinion, the nature of receipt is to be judged in the hands of the recipients. We find the Hon ble Allahabad Court in the case of CIT vs Shiv Nath Prasad, (1970) 77 ITR 378, 382 (All.) has held that if the amount initially received partakes of the character of a trading receipt, the amount would necessarily be taxable as such. However, if the amounts are initially not taxable, they cannot be taxed despite the magnitude of the accumulation and despite its appropriation by the assessee to his own credit subsequently. 33.18. We find the Hon ble Supreme Court in the case of P.H. Divecha v. CIT reported in 48 ITR 222(SC) has observed as under:- If the payment is by another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law is the basis of several judgments delivered on this issue by our Courts. In some cases, the principle laid down by Lord Greene has not been followed because of special facts, but the principle as such has not been doubted. 33.20. And thereafter it has held as under:- 22 The principle laid down by Atkinson, J., applies in full force to the facts of this case. If a common sense view of the matter is taken, the assessee, because of the trading operation, had become richer by the amount which it transferred to its profit and loss account. The moneys had arisen out of ordinary trading transactions. Although the amounts received originally was not of income nature, the amounts remained with the assessee for a long period unclaimed by the trade parties. By lapse of time, the claim of the deposit became time barred and the amount attained a totally different quality. It became a definite trade surplus, Atkinson, J. pointed out that in Morley's case (supra) no trading asset was created. Mere change of method of book-keeping had taken place. But, where a new asset came into being automatically by operation of law, commonsense demanded that the amount should be entered in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Similarly ground number 2 is with respect to the argument that whether the above receipt constituted receipt from exploitation of valuable commercial rights and chargeable to tax u/s 28 ( iv) of the act, has also been decided by the special bench as Under:- F. APPLICABILITY OF SECTIONS 28(i) and 28(iv) : 36. The next question that is to be decided is the applicability of section 28(i) and 28(iv) as raised by the Revenue in the additional grounds. We have heard the rival arguments made by both sides for admission of the additional grounds. We do not find any force in the argument of the Ld. Sr. Counsel for the Assessee that since this issue was not raised before the authorities below, the Tribunal should not admit the additional ground. Since the material facts are already available on record and the additional grounds raised by the Revenue are purely legal, therefore, following the decisions of the Hon ble Supreme Court in the cases of NTPC Ltd., reported in 229 ITR 383 (SC) and Jute Corporation of India Ltd. vs. CIT, 187 ITR 688 (SC), we admit the additional ground raised by the Revenue for adjudication. 36.1. Now, coming to the applicability of the provisions of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange crunch. In the circumstances, around June 7, 1965, the Government of India and the Reserve Bank of India, in this case, approved the arrangement under which KJC (supplier of toolings) was permitted to advance a loan of $ 6,50,000 to the assessee for ten years bearing interest at the rate of 6 per cent., free from income-tax. KJC was later on taken over by AMC and as a part of take-over, AMC agreed to waive the principal amount of the loan and not the interest. In the circumstances, as stated in the above three undisputed facts, the assessee paid interest at 6 per cent. per annum, for ten years, being the contractual period. According to the Assessing Officer, the loan arose from business dealings. According to the Assessing Officer when AMC waived the loan, the credits became part of business income ; that prior to such waiver, the credits represented liability. In the circumstances, the Assessing Officer has taxed such credits as business income. However, in this connection, there are two important facts which are verlooked by the Assessing Officer. Firstly, the assessee has continued to pay interest at 6 per cent. for a period of ten years on the loan amount. In this case, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ash or money [see CIT vs. Alchemic (P) Ltd. (1981) 20 CTR (Guj) 83 : (1981) 130 ITR 168 (Guj)] .. (ii) Benefit or perquisite must be one arising in the course of business. 36.6. Moreover, we find, the credits received by the Assessee from IAE, in the present case, are in the form of money. The Supreme Court in the case of Mafatlal Gangabhai Co. Pvt. Ltd., reported in 219 ITR 644 (SC) and the Hon ble Delhi High Court in the case of Ravinder Singh, reported in 205 ITR 353 (Del.) and the Hon ble Bombay High Court in the case of Mahindra Mahindra (supra), have held that provisions of section 28(iv) are applicable only when benefit or perquisite is received in a non-monetary form . 36.7 Therefore, we hold that the provisions of section 28(i) and 28(iv) are not applicable to the facts of the present case and the credits received are not taxable as business income. 36.8. So far as the argument of the Ld. Special Counsel for the Revenue that the credits received are taxable as commission income is concerned, we find such argument was rejected by the Division Bench in the A.Y. 2007-2008 with which we concur. The submission of the Ld. Special Counsel for the Revenue now tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aircrafts. It has not been demonstrated, how acquisition of Aircrafts or selection of engines was a business activity by itself. We find, the A.O. in the impugned assessment year holds that the assessee is a company engaged in the business of operating low cost airline in India under the name and brand of INDIGO . It is also an admitted position that for purchase of 34 aircrafts, credits received are capital in nature. There is also no dispute that these 34 aircrafts are fixed assets and not stock-in-trade. Aircrafts are thus part of fixed capital. Since the assessee has acquired aircrafts which are it s commercial assets forming part of its fixed capital and these commercial assets are used by it to earn income by operation of aircrafts, therefore, we are of the opinion that there is no adventure in the nature of trade when aircrafts acquisition is made or engines are selected. We, therefore, reject the arguments advanced by the ld. Special Counsel for the Revenue on this issue. 21. In view of the above findings of the special bench that credit receives are also not taxable either u/s 28 (i) or u/s 28(iv) of the act we dismiss ground number 2 of the appeal of the learned AO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hearing both sides we find Article-21 of the Agreement Dated 18.11.2005, which has already been reproduced earlier, shows that AIRBUS has allowed the assessee to assign its rights to acquire aircraft for purposes of obtaining finance. There is no consideration paid by the Lessors to the Assessee when such an assignment is made which is also apparent from the Paper Book filed by the Revenue. As noted earlier the credits were received by the Assessee from IAE. It has already been held by us earlier that these were separate transactions. We are, therefore, unable to uphold the findings of the Ld. CIT(A) as per Para-10.2.1 of his Order relied on by Learned Special Counsel for the Revenue. The findings of the Ld. CIT(A), in our opinion, are based on conjectures and surmises when he wrongly views the Agreements with IAE, AIRBUS and Lessors as an amalgamation. When the Ld. CIT(A) himself noted that right to acquire Aircraft has been assigned to Lessor at par value then, there is no consideration received for such assignment. Although right to acquire Aircraft from IAE is a Capital Asset , however, for applicability of provisions of Section 48 which deals with computation of capital gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has taken an alternative stand that the lease rentals have a direct nexus with the price of the aircraft that the Lessors have to pay for. According to him, the higher the sale price the higher is the amount of lease rentals. It is alleged by him that the assessee has received credits for the purchase of engines and such credits have not been transferred to Lessors. He, therefore, held that the lease rentals got determined at a price higher than the one which would have been determined if the credits would have been passed on to the Lessors. The learned CIT(A) therefore held that the expense of lease rentals is partly attributable to the credits received by the assessee. According to him, expenditure incurred for earning a capital receipt assumes the character of a capital expenditure and ought to be disallowed u/s 37(1) of the Act. 39.1. It is the submission of the learned Senior Counsel for the assessee that the learned CIT(A) has erroneously presumed that lease rentals are partly attributable to the earning of credits by the appellant from engine manufactures. 39.2. We have considered the rival submission made by both the sides on this issue. We have already upheld the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the sanction of the grant to the appellant. The grant was only of a sum of ₹ 1.84 crores (US $ 514,000) as apprised by the technical reviewer of the world Hank, as against the ₹ 3.2 crores cost of the plant. There was no correlation whatsoever between lease rentals paid by the assessee and the grant The grant was made in public interest, to protect the environment from ozone depleting substances. The grant had nothing to do with the settling up of the industry or its economics or profitability. On these facts, we agree with the Id. Counsel for the assessee that the ratio of the Supreme Court decision in the case of Sahaney Steel conclusively covers the issue in favour of the assessee. their Lordships of the Supreme Court held that, to determine the nature of the subsidy or grant, the purpose of the grant had to be looked at. The grant, as per their lordships of the Supreme Court, was rightly a capital receipt when the main purpose of the grant was for instance relief from unemployment. It was also capital receipt when the grant was given as an aid to construction of dry dock and not as operational subsidy. Their Lordships of the Subsidy court had also endorsed the fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance under section 40(a)(i) of the I.T. Act, 1961 alleging that owing to non-deduction of tax, the expenditure is disallowable. However, the Ld. CIT(A) held that payment of SR is reimbursable and hence the expenditure is not allowable under section 37(1) of the I.T. Act, 1961. 40.1. We find an identical issue came up before the Division Bench in assessee s own case in AY 2007-08, wherein the Tribunal held as under:- 10.2 It was submitted by the learned senior counsel that the learned CIT has erroneously compared payment of supplementary lease rent in the present case with payments for providing spares, facilities or services in connection with the operation of lease aircraft. In support of this, the learned senior counsel referred to the lease agreement executed between M/s McR Aviation Limited and Interglobe dated 15.12.006, copy of which is enclosed at pages 76 to 175 of the Paper Book. It was submitted by the learned senior counsel that the terms conditions of the lease agreement executed by Interglobe were identical to those, which were considered by Delhi Bench of IT AT in the case of Sahara Airlines (supra). To draw parity between the two cases, the learned se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al / Installation . of APUs removal/installation of Landing Gear, structural and non- structural components including but not limited to nacelle structures, the thrust reversers, cowlings and engine mounts, or shipping charges, and (ii) no Material Default or Event of Default is continuing, promptly pay to Lessee the following amounts ( Lessor Maintenance Disbursements ) from the respective Maintenance Supplemental Rent account. (i) Airframe 4C/6Y Checks: with respect to a scheduled heavy structural 4C/6Y checks of the Airframe if it comes due during the Sublease Term, the lesser of (i) the amount of such invoice and (ii) the net balance of Airframe 4C Maintenance Supplemental Rent received by Lessor at the time of payment; (ii) Airframe 8C/12Y Checks: with respect to a scheduled heavy structural 8C/12Y checks of the Airframe if it comes due during the Sublease Term, the lesser of (i) the amount of such invoice and (ii) the net balance of Airframe 8C Maintenance Supplemental Rent received by Lessor at the time of payment; (iii)Engine Refurbishment: with respect to any Overhaul for an Engine, the lesser of (i) the amount of such invoice and (ii) the net balance of Eng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircraft, Engines and all of the Parts (a) in accordance with the Maintenance program, (b) in accordance with the rules and regulations of the Aviation Authority, (c) in accordance with Manufacturer's type design, (d) so as to ensure that the Aircraft meets the requirements of its type certificate data sheets in accordance with all Aviation Authority requirements, (e) so as to keep the Aircraft in as good an operating condition as when delivered to Lessee (ordinary wear and tear excepted) and in accordance with any other regulations or requirements necessary in order to maintain a valid Certificate of Airworthiness for the Aircraft and meet the requirements at all times during the Sublease Term and upon return of the Aircraft to Lessor for issuance of a standard Certificate of Airworthiness for transport category aircraft issued by the Aviation Authority in accordance with applicable laws (except during those periods when the Aircraft is undergoing maintenance or repairs as required or permitted this Sublease) and (f) in the same mariner and with the same care as used by lessee with respect of similar aircraft and engines operated by Lessee and without in any way discriminating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce with the judicial wisdom of the superior court then the same cannot be termed as erroneous or prejudicial to the interest of revenue. In support of this proposition, learned senior counsel relied upon the decision of Hon'ble Delhi High Court in case of Honda Siel Power Products Ltd. reported in 333 ITR 547 (Del). It was further clarified by him that in reply to show cause notice u/s 263 of the Act issued by the learned CIT the appellant had specifically pointed out that as per the decision of this Bench of the IT AT in the case of Sahara Airlines (supra) payment for supplementary lease rent is exempt u/s 10(15A) of the Act, however, the learned CIT in this order has completely ignored the same and premised upon mere suppositions held that supplementary lease rentals were paid to lessor as reimbursement of expenses incurred towards providing facilities or services in connection with the operation of these aircrafts. Alternatively it was also claimed by the learned senior counsel that the payment of supplementary lease rents is also not liable to tax in India as per the provisions of Article 12 of the DTAA between India and Ireland. 11. Per contrary, the learned CIT(DR) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould get the aircraft repaired out of the reserves. Further, the quantum of reserve depends upon the period of use of the aircraft and the right of reimbursement is only limited to the extent of reserve only. If the cost of repair exceeds the reserve, then such liability has to be borne by the assessee only. 11. In view of the above discussion, it is clear that the supplemental rent was paid and kept in the form of reserves only for meeting the expenditure which was to be incurred by the lessee to keep the aircraft in airworthy condition. Therefore, we are in agreement with the contention of the Id. Sr. DR that the payment by the lessee by way of supplemental rent was in connection with the operation of the leased aircraft. But that is not enough for holding that such payment fall within the exclusionary provisions of section 10(15A) of the Act. In order to fall within the ambit of such exclusionary provisions, there must exist the inextricable link between the expenditure regarding supply of spares or for use of any facility or for rendering of any service by the lessor and operation of the leased aircraft. Article 13 of the agreement does not provide for utilisation of reser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t fell within the ambit of such exclusionary provisions. The Id. Sr. DR has not been able to point out any of the terms of the agreement on the basis of which it can be said that lessor was required to provide for spares, facility or services in connection with the operation of the leased aircraft. He has also not brought any material or evidence to suggest that lessor in fact supplied any spare or provided any facility or service whatsoever in connection with the operation of the leased aircraft. Therefore, we are in complete agreement with the contention of the learned counsel for the assessee that the supplemental rent did not fall within the ambit of the exclusionary provisions of section 10(15A) of the Act. Since prior to 1-4- 1996 such payments were covered by the main provisions, as originally inserted, it can be said that such payments continued to be exempt under section 10(15A) of the Act. Consequently, the same was not chargeable to tax and, therefore, there was no obligation on the assessee to deduct the tax at source under section 195 of the Act. The question of holding the assessee as an assessee in default under section 201(1) of the Act, therefore, does not arise. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il 1996 such payments continued to be exempted under Section 10(15A) of the Act, they were not chargeable to tax. Consequently, there was no obligation on the Assessee to deduct the tax at source under Section 195 of the Act. The question of holding the Assessee as an Assessee in default under Section 201(1) of the Act, therefore, did not arise. 50. Consequently, the Court affirms the order of the IT AT deleting the additions made by the AO under Section 195, read with Section 40(a)(i) of the Act on account of the non-deduction of tax at source for the payment of supplemental lease rent to the various lessors, i.e., ILFC, AMTEC, Malaysian Airlines and Lufthansa. 12.2 The learned senior counsel is thus justified is drawing parity of facts between the present case and the case of Sahara Airlines (supra) as we observe that both the lease agreements are similar in terminology and intent. We further observe that even the Ld. CAT in the impugned order accepts that primary responsibility to maintain the aircraft is that of Interglobe. However thereafter no facts have been brought on record to demonstrate that payment for Supplementary Rent is towards provision of either spares, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mounts shall have all rights, powers and remedies provided for herein or in any other Operative Document or by Law or equity or otherwise in the case of non-payment of Base Rent. 40.4. In our opinion, the Ld. CIT(A) has erroneously held that SR is reimbursable. In case of an operating lease the lessor is the owner of the aircraft. Aircrafts are enormously expensive and to ensure timely maintenance of the aircraft SR is determined and paid. When the scheduled maintenance becomes due the lessee incurs the maintenance expense and this expense is reimbursed by the lessor to the extent of SR fund maintained by the lessor. This ensures that on redelivery of the aircraft when lease term expires the aircraft is in good condition. The lease agreement provides for reimbursement of maintenance expense and not of SR. This is clearly apparent from the following clauses: Section 3.12 Maintenance Supplemental Rent 3.12.1 On the twelfth (12th) day of each calendar month following the Delivery Date during the Sublease Term and on the Expiry Date, Lessee will pay to Lessor, as Supplemental Rent, Maintenance Supplemental Rent for the Airframe, Engines, Landing Gear and APU in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Date in accordance with the terms of Exhibit H hereto 3.12.4. Lessor Maintenance Disbursements (1) If Lessee submits to lessor, within sixty (60) days after the completion of the applicable approved maintenance work (except if otherwise agreed between Lessor and Lessee, it being agreed that such time periods may be extended as determined in the reasonable discretion of Lessor, to the extent that Lessee notifies Lessor at or before the end of such sixty (60) day period that there are still outstanding invoices (which shall be specifically identified) for approved maintenance work) an invoice and supporting documentation evidencing performance of and payment for (each in reasonable detail) the following work by or on behalf of Lessee, lessor shall, provided that (i) no reimbursement shall be made in respect of replacement, repair or overhaul caused by foreign object damage, domestic object damage, operational or other mishandling, faulty maintenance or any accidental cause or in respect of any cost which is reimbursable by insurance or which relates to convenience, premature or unscheduled shop visits or overhauls or Lessee effected operational modifications, Engine QEC, Engine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of payment. (2) For the avoidance of doubt, Lessee has no right to payment of any Lessor Maintenance Disbursement except (i) following the occurrence of a Total Loss following payment of all moneys due and owing pursuant to Section 14.3.2 (ii) as expressly provided in this Section 3.12.4 and (Hi) as expressly provided in Exhibit H, and any remaining balances of the Maintenance Supplemental Rent following the Expiry Date, after application of the foregoing provisions, shall be retained by Lessor as its sole property, with the exceptions set forth in Exhibit H. To the extent any maintenance expenses exceed the amount available in the applicable Maintenance Supplemental Rent account, such expenses shall be for the account of the Lessee and the shortfall, if any, shall not be carried forward or made the subject of any further claim for reimbursement. Lessee acknowledges that Lessor may commingle the Maintenance Supplemental Rent with its general funds and no interest shall accrue in favor of Lessee in respect of Maintenance Supplemental Rent held by Lessor. 40.5. Therefore, clearly the Supplemental Rent is a permanent outflow from the coffers of the assessee and post paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent is nothing different than the character of basic rent which is also payable under the Lease Agreement to the Lessors. It was held that Supplementary Rent is not a payment made for use of spares, facilities or any services, whereas Basic Rent is a fixed amount. Supplementary Rent is determined taking into consideration the number of flying hours. Supplementary Rent, in our opinion, is a payment made for lease of aircraft. The Lease Agreement defines Rent as means collectively Base Rent and Supplementary Rent . Therefore, respectfully following the decision of Tribunal for A.Y. 2007- 2008 which has also been followed in subsequent years, we hold that payment of Supplementary Rent of ₹ 61,81,04,551/- is exempt from tax in hands of Lessors as per provisions of section 10(15A) and hence, disallowance under section 40(a)(i) is not called for. However, the above figure is subject to verification by the AO. 29. In view of the above decision of the special bench, respectfully following it we allow ground number 4 (a) of the appeal of the assessee with similar direction. 30. Coming to disallowance of supplementary rent for lease agreements executed after 1 April 2007 amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of the royalties or fees for technical services. 3. (a) The term royalties as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph film or films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process or for the use of or the right to use industrial, commercial or scientific equipment, other than an aircraft, or for information concerning industrial, commercial or scientific experience; (b) The term fees for technical services means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12(3)(a) of India-Ireland DTAA, the term Royalty is specifically defined to exclude from its scope payment of any kind for use of Aircraft . We further find the tax treaty also incorporates a separate provision in Article-8 on profits from shipping and air transport. Article 8(1) reads as under : Profits derived by an enterprise of a contractor state from the operation of rental of ships or aircraft in international traffic and the rental of containers and related equipment which is incidental to the operation of ships or aircraft in international traffic shall be taxable only in that contractor State. 42.3. This Article states that profits from rental of Aircrafts is taxable only in state of residence of Lessor. We, therefore, find merit in the arguments of the Learned Senior Counsel for the Assessee that as per Articles 12 and 8 of the Tax Treaty with Ireland, profits derived by an enterprise of a contracting State from rental of Aircraft are taxable only in Ireland. Supplementary Rent of ₹ 276,28,59.821/- paid for Lease Agreements executed after 01.04.2007 are, therefore, not chargeable to tax in India. However, the above figure is subject to verification b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of valuable commercial rights arising in the course of systematic in real business activity and such receipts would otherwise constitute income liable to tax Under the provisions of Section 28 (iv) of the act. This ground is identical to ground number 2 of the appeal of the learned assessing officer for assessment year 2013 14. This ground is been dismissed buyers following the order of the special bench in case of the assessee for assessment year 2012 13. As both the parties confirmed that there is no change in the facts and circumstances of the case for the similar reasons given by has while deciding ground number 2 of the appeal of the learned assessing officer for assessment year 2012 13 we also dismiss this ground i.e. ground number 2 of the appeal of the learned assessing officer. 39. The learned AO has raised the additional ground of appeal while latter dated 9/2/2018 wherein it has been contested that without prejudice to the above two grounds the learned CIT A having held that the receipts were in the nature of capital receipts he ought to have followed the order of the predecessors CIT in assessment year 2012-13 that these capital receipts would enter int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is dismissed. 45. Thus, appeal filed by assessee in ITA number 433/del/2018 for assessment year 2014 15 is partly allowed. 46. Accordingly, for assessment year, 2014 15 appeal filed by the learned assessing officer in 413 Del 2018 is dismissed and appeal filed by the assessee in 413 Del 2018 is partly allowed. Assessment Year 2015-16 ITA number 7695 Del 2018 (by assessee) 47. This appeal is filed by assessee against the order passed by the Commissioner of income tax (A) 35, New Delhi dated 20/9/2018. The assessee has raised identical grounds of appeal, which were raised before us for assessment year 2013 14 and 2014 15. Both the parties confirmed that there is no change in the facts and circumstances of the case as compared to the facts of the case of the assessee for assessment year 2013 14 and 2014 15. Both the parties also confirmed that their arguments also remain the same. 48. Ground number 1 and 2 of the appeal is general in nature and therefore those are dismissed. 49. Ground number 3 of the appeal is against the order of the learned CIT A who has upheld the disallowance u/s 37 (1) of lease rental payment to the tune of ₹ 4,092, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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